Chancery Defers Request for Interim Fees in Class Action

In Frank v. Elgamal, C.A. No. 6120-VCN (Del. Ch. July 28, 2011), read letter ruling here, the Delaware Court of Chancery deferred making a decision on an application for interim fees in a class action challenging an acquisition.

Issue Addressed

Where post-complaint, supplemental disclosures partially mooted claims challenging a transaction, but price and process claims remain viable and are still pending, is an interim fee request covering the disclosure claims premature?

Background

This suit was brought to challenge an acquisition of American Surgical Holdings, Inc. by Great Point Partners I, L.P. Soon after the preliminary proxy statement was filed, this action was instituted, alleging breach of fiduciary duties, unfair price and process, inadequate disclosures, and related claims. A definitive proxy statement was filed about two weeks after a motion was submitted to the Court seeking expedited proceedings and a preliminary injunction. The additional disclosures obviated the need for a preliminary injunction and the merger closed about two months later.

Discussion

The Court began its discussion with a recognition of the American Rule which provides that, generally speaking, each party "pays their own way" for lawsuits. There are well-established exceptions to the general rule, such as in class actions, where, as here, the corporate benefit doctrine is invoked.  Under this doctrine, "the Court may order the payment of counsel fees and related expenses to a plaintiff whose efforts result in ... the conferring of a corporate benefit." This applies even where a common fund is not created and when there may be no monetary or quantifiable benefit other than additional disclosures.

When a defendant corporation or board of directors moots a plaintiff's claim, as here, attorneys' fees may still be awarded if three criteria are satisfied:

(1) the suit was meritorious when filed, (2) the action producing the corporate benefit was taken by the defendant corporation before a judicial resolution, and (3) the resulting corporate benefit was causally related to the lawsuit. In challenging a fee application in that context, the defendant must demonstrate that no causal link exists between the benefit produced and the filing of the plaintiff's action." (citations omitted)

Seems uncomplicated, right? Not if the fee request is an interim application.

Although an interim fee request was granted in the recent Del Monte decision by the Court of Chancery as highlighted here, each member of the Court makes his own independent application of the law to the facts and the nuances of that application from the perspective of the author of this decision required a different result. Here's why: We start with the general rule that interim fee awards, according to this decision, "are generally disfavored". See footnote 11 for cases cited. The Court explained the reasons for the policy, but also recognized exceptions in appropriate circumstances. See footnote 15.

Ultimately, it is within the Court's discretion whether or not to entertain an interim fee request, even in cases such as this one where there seems to be a consensus that the fee was earned at least insofar as supplemental disclosures were obtained. Nonetheless, the Court basically concluded that it was not required to address the issue at this stage and there being no exigent circumstances militating in favor of a contrary conclusion, the Court denied the application without prejudice and described it as being premature.

Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.

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